June 16, 2008
The Countrywide Financial sweetheart loan scandal continues to grow, spreading to Senators and other Beltway potentates. We are about to find out if Congress's passion for investigating business ethics extends to conflicts of interest and cash that involve fellow Members.

Take Senator Kent Conrad, the North Dakota Democrat whose office issued a Friday statement saying that "I never met Angelo Mozilo." What he did not say then but admitted under later questioning by a Journal reporter is that, although he may not have had a face-to-face meeting with the Countrywide CEO, Mr. Conrad had called Mr. Mozilo and asked for a loan. The result was a discounted loan on his million-dollar beach house and a separate commercial loan of a type that residential lender Countrywide did not even offer to other customers, regardless of the rate.

So after calling the CEO of a company with various matters before the Senate, asking for a loan and then receiving at least two sweetheart deals, Mr. Conrad now says: "I did not think for one moment – and no one ever suggested to me – that I was getting preferential treatment." Lawyers will immediately wonder if this isn't a version of the "ostrich defense," which judges describe during jury instruction as willful blindness or deliberate ignorance. For what other reason, besides preferential treatment, would one call the CEO of the mortgage company? Does Mr. Conrad call August Busch IV when he wants to buy a six-pack?

Almost as breathtaking is Senator Conrad's attempt to use a charitable contribution for the estimated amount of any mortgage savings – $10,500 – to make the issue go away. So while the Senator says he did nothing wrong, now that his nonmistake has been discovered he'll nonetheless give away the nonspecial treatment cash. There is ample evidence here to warrant an investigation, including subpoenas for relevant documents.

The same goes for Senator Christopher Dodd (D., Conn.), who chairs the very Banking Committee responsible for drafting the laws that govern Countrywide's market. Mr. Dodd is still in denial mode, but so far no one has knocked down the Portfolio.com story that he received discounted loans as part of Countrywide's "Friends of Angelo" program.

In the week since the Journal revealed this program, the key questions have become clear: What did Countrywide CEO Angelo Mozilo receive – or think he would receive – in return for the friendly loans to politicians? And what did Mr. Mozilo get – or think he would get – in return for sweetheart loans to Fannie Mae CEOs Jim Johnson and Franklin Raines? Mr. Conrad says he called Mr. Mozilo at the suggestion of Mr. Johnson, a leading and long-time member of the Democratic Beltway establishment.

The relationship between Countrywide and Fannie Mae goes to the heart of the mortgage crisis. Fannie makes its money by borrowing vast sums at low rates (thanks to an implied taxpayer guarantee on its loans) and then using that cash to buy loans from mortgage originators like Countrywide. Fannie then holds the mortgages and earns interest on them, or pools them into securities for sale to investors.

Fannie has been buying more home loans from Countrywide than from anyone else. In its most recent 10-K report filed with the Securities and Exchange Commission in February, the company reports: "Our top customer, Countrywide Financial Corporation (through its subsidiaries), accounted for approximately 28% of our single-family business volume in 2007, compared with 26% in 2006."

A Fannie spokesman tell us that "for competitive and proprietary reasons, we can't provide information about the terms we agree to with specific lenders," and adds, "We don't have lender-specific performance data available." Count us among the skeptics that Fannie hasn't bothered to check how well Countrywide's loans perform compared to those of other lenders vying to do business with the government-sponsored giant. But then again, we don't know what terms Countrywide's competitors offer on loans to Fannie CEOs.

Those wondering why Bank of America continues to move forward on its planned purchase of the controversial Countrywide might consider that BofA, despite its huge brand name and resources, has been able to capture only 4% of Fannie's single-family business on its own. Clearly, there's something about Angelo.

For the sake of its shareholders and the taxpayers who are ultimately on the hook, Fannie should immediately launch an internal investigation into the terms offered to Countrywide, and exactly what role Messrs. Johnson and Raines played in the negotiation of these terms. Did these men exert any pressure on Fannie employees to do business with Countrywide?

Congress also needs a full accounting of the contacts between Countrywide and the politicians receiving favors from the lender. Did Countrywide ask for and receive assistance from the Friends of Angelo? With Senate Banking Chairman Dodd at the center of the scandal, ranking member Richard Shelby (R., Ala.) and House Financial Services Chairman Barney Frank (D., Mass.) will have to lead the inquiry.

But taxpayers should not have to wait for the results of an investigation. Democrats in Congress are trying to pass a bailout for mortgage borrowers and lenders like Countrywide, and they have been holding reform of Fannie Mae and its cousin Freddie Mac hostage to get President Bush to agree. Mr. Dodd is one of the main hostage-takers. It is time he and Mr. Frank dropped this political ransom-taking and finally subjected Fannie and Freddie to tough oversight. This means giving a regulator the power to set their capital ratios and portfolio securities limits, so that taxpayers have some protection against their potential losses.

Meanwhile, until it is clear how much Countrywide will benefit from Senator Dodd's proposed $300 billion mortgage rescue – and exactly how Mr. Dodd came to do business with Countrywide – Congress should call a halt to legislating bailouts. Taxpayers deserve no less.

BUT - it doesn't sound like the borrowers really benefitted more than any other rich borrower. I received similar treatment from a mortgage refinance last week (waived fees, lower points) through Bank of America Premier Banking Services.

What year were the loans given in? Was it recent? Source sounds kind of biased, at best.

BUT - it doesn't sound like the borrowers really benefitted more than any other rich borrower. I received similar treatment from a mortgage refinance last week (waived fees, lower points) through Bank of America Premier Banking Services.

What year were the loans given in? Was it recent? Source sounds kind of biased, at best.

You're correct. By now we all know Scotty's posts have to be viewed through a very skeptical lense. This is pretty much a non-story story. The loans were taken between 2002 and 2003 well before the sub prime mess. All sounds innocent enough to me. Nothing like, say, the Keating Five scandal that John McCain was caught up in a few years ago.

If someone really starts turning over rocks you can bet there will be slime on both sides of the aisle

June 16, 2008
The Countrywide Financial sweetheart loan scandal continues to grow, spreading to Senators and other Beltway potentates. We are about to find out if Congress's passion for investigating business ethics extends to conflicts of interest and cash that involve fellow Members.